Testing the Theory of the Firm Under Price and Background Risk: A Comment

ABSTRACT This comment revisits the theoretical analysis of firm behavior under price and background risk conducted by Bonilla, Sabat and Vergara (BSV) in a recent article in this journal. It is shown that (i) additive background risk alone does not affect optimal production decisions relative to the certainty scenario, that (ii) output price risk alone entails a contraction in optimal production even for prudent entrepreneurs, and that (iii) BSV's characterization of positive precautionary output under multiple risks fails to hold in the presence of non‐negatively correlated price and background risk.